E$21\mathrm{.}13($LO $2,3)($Lessee$-$Lessor Entries, Sales$-$Type Lease; Guaranteed Residual Value$)$ Phelps plc leases a building to Walsh Ltd$.$ on January $1,2022.$ The following facts pertain to the lease agreement.

The lease term is $5$ years, with equal annual rental payments of $4,703$ at the beginning of each year.

Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature.

The building has a fair value of $23,000,$ a book value to Phelps of $16,000,$ and a useful life of $6$ years.

At the end of the lease term, Phelps and Walsh expect there to be an unguaranteed residual value of $4,000.$

Phelps wants to earn a return of $8\%$ on the lease, and collectibility of the payments is probable. This rate is known by Walsh.

Instructions

a$.$ How would Phelps $($lessor$)$ classify this lease? How would Phelps initially measure the lease receivable, and how would Walsh initially measure the lease liability and right$-$of$-$use asset?

b$.$ Using the original facts of the lease, show the journal entries to be made by both Phelps and Walsh in $2022.$

c$.$ Suppose the entire expected residual value of $4,000$ is guaranteed by Walsh. How will this change your answer to part $($a$)?$

d$.$ Assume the same facts as in part $($c$),$ except the expected residual value is ${}_3,000.$ Does your answer change?